Fiscal Crisis, Exchange Rate and Interest Rates

The Costa Rican government is facing a complex scenario, since by not achieving consensus to access international loans, it will be forced to seek domestic funding sources, which would put pressure on the exchange rate and interest rates to rise.

Monday, November 9, 2020

The economic crisis that the country is going through due to the outbreak of covid-19 ended up sharpening the country's fiscal situation. In this context of falling economic activity and declining government revenues, on September 17 the Alvarado administration presented the plan with which it intends to mitigate the fiscal impact of the health crisis, a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a credit of $1.75 billion.

The news was not well received in the country, since in order to access the credit line, the government proposed to tax financial transactions, increase the tax on the profits of companies and individuals, and increase the tax on real estate.

After multiple violent protests were reported, the government ended up reversing the plan and called for a national dialogue.

A $265 million loan that would be requested from the Inter-American Development Bank, is another of the public financing projects that have failed, after the deputies voted against this credit on November 4.

Given the lack of capacity to continue borrowing from international organizations, the government needs to turn to the internal market to access sources of financing. This option would influence the exchange rate and interest rates, according to authorities of the Central Bank of Costa Rica (BCCR).

Check out the "System for monitoring markets and economic situation in Central American countries" of CentralAmericaData.

In an article published on November 9 by Nacion.com, Rodrigo Cubero, president of the BCCR, explained that "... A delay in the materialization of the necessary fiscal adjustment or an insufficient adjustment would generate growing uncertainty, reduced financing for the government and sustained pressure on interest rates and the exchange rate."

Cubero believes that "... the risk would increase if the multilateral budget support credits at concessional rates were not approved by the Legislative Assembly, thus forcing the government to contract more expensive doubt in the local market."

Improving the organization and efficiency of the public sector, reducing the cost of doing business in the country, strengthening competition, transportation and telecommunications infrastructure, are actions that should be strengthened in parallel with fiscal adjustments, according to the BCCR hierarchy.

See full opinion article (in Spanish).



More on this topic

Public Finances: What is Expected in 2021

October 2020

After the Alvarado administration agreed to backtrack on the proposal to negotiate a $1.75 billion loan with the IMF, it is predicted that next year the government will depend on domestic debt to finance its expenditures.

In mid-September, and in the context of a severe economic crisis that had been brewing before the pandemic, the Executive presented the plan with which it intended to mitigate the fiscal impact of the Covid-19 crisis, a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a $1.75 billion loan.

Strong Dollar Income to Press Exchange Rate

July 2019

In Costa Rica, it is expected that the downward trend that has been showing the exchange rate since February will intensify in the coming months, when the $3.580 million begins to enter as a result of the issuance of Eurobonds and loans granted by external entities.

According to data from the Central Bank of Costa Rica (BCCR), between the beginning of February and July 30 of this year, there has been a fall of up to 44 colones per dollar, reporting a drop in the average rate in the wholesale market Monex from ¢613.87 to ¢570.13.

Less Uncertainty, Better Outlook

November 2018

After Costa Rica's Constitutional Chamber prepared the path for tax reform in the Congress, the dollar's price against the local currency stopped rising, and positive reactions were reported in the risk outlook.

Last November 23rd, Court IV issued its judgment, so the law project has a free way to move forward more quickly during the coming weeks in the Congress.

Risk Rating Downgrade Approaching

October 2018

Moody's downgraded the long-term issuer ratings and the Costa Rican government's unsecured bonds.

Yesterday the risk rating agency reported that expectations of a continued decline in fiscal indicators and evidence of increased financing needs are some of the reasons behind the decision to revise the country's debt rating.

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